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January 23, 2015, 3:11 P.M. ET

DAVOS: Novartis Is in Good Health Despite Franc Impact

By Jonathan Buck

Pharmaceuticals giant Novartis, like most Swiss companies, was hurt by last week’s upheaval in the Swiss franc, but the drop in the price of its shares offers an attractive entry point.

The stock (ticker: NOVN.Switzerland) can add 15% in value if it returns to the level where it traded before Jan. 15, when the Swiss franc rose steeply against the euro after the Swiss National Bank unexpectedly abandoned its policy of defending a floor for the euro against the local currency.

Since then, the Swiss franc has appreciated about 18% against the common currency, making goods manufactured in Switzerland more expensive in euro terms.

“People have overestimated the amount of cost base that we have in Switzerland,” said Novartis Chief Executive Joseph Jimenez in an interview on the sidelines of the World Economic Forum’s annual meeting in Davos.

About 12% of Novartis’ costs are denominated in Swiss francs. Switzerland also accounts for about 2% of revenues. The Basel-based company reported revenues of $57.92 billion in 2013. It is due to report earnings for 2014 on Jan. 27.

“A 10% increase in the Swiss franc would be about a $300 million to $400 million cost increase for the company. But on a $60 billion company, that can be easily mitigated through a number of actions,” said Jimenez.

Novartis is expected to report 2014 net income of $12.55 billion, or $5.18 per share, on revenues of $57.63 billion. In 2015, it is forecast to earn net income of $13.25 billion, or $5.66 per share, on revenues of $55.19 billion. Novartis, whose market value is over 230 billion Swiss francs ($262 billion), reports earnings in dollars.

The projected decline in sales is due to management restructuring its portfolio to concentrate on pharmaceuticals, eye-care division Alcon, and its generics business. It is acquiring GlaxoSmithKline’s (GSK) oncology business and it is selling the United Kingdom drug maker its vaccines business. It has sold its animal-health business to Eli Lilly (LLY).

Together, the vaccines and animal-health businesses accounted for more than 10% of Novartis’ annual revenue.

The transaction with Eli Lilly is already completed and the deals with GSK are expected to close in the first half of 2015. At that point, “we will have positioned the company for a good future,” said Jimenez.

“I am feeling good about where the company is,” he added. “We have spent a lot of time getting our portfolio right.”

About Davos Report

The World Economic Forum’s annual meeting in Davos, Switzerland, attracts 1,500 corporate leaders. On the sidelines of the meeting, we talk to executives to learn about business trends and strategic developments.

The blog is written by Barron’s Europe Editor Jonathan Buck, who previously worked for The Wall Street Journal and its international editions. He has attended the World Economic Forum’s annual meeting each year since 2011.